Horton Business Group

Experts at Buying and Selling
Businesses

Asset versus Stock
Deal

When the buyer purchases the stock
of the company, he or she buys the total assets and the total
liabilities. This includes current liabilities and current assets.
This also means the buyer gets the working capital at the time of
sale.

On an asset deal the buyer buys
the tangible assets and goodwill of the company. He or she does not
buy any liabilities either current or long term and usually this
does not include current assets such as cash and receivables. For an
asset sale , the Seller must designate whether any portion of the
current assets come with the business.

Therefore, the price of the
business for a stock sale would be higher than for an asset sale,
assuming that long term liabilities would be excluded in the sale.

Many times, buyers will make an
offer for an Asset Sale and specify that a fixed amount of working
capital (current assets – current liabilities) be included. This is
by definition an offer that is lower than the asking price. Note
that one of the reasons that Sellers do not specify working capital
to be included in the price is because the working capital changes
day by day depending on operational cash flow.

Many buyers will not make an
offer to buy stock for legal reasons. Their lawyers will advise them
that the company they are purchasing could have an unforeseen
liability and/or legal action that the buyer now assumes since she
or he has purchased the stock. Many times in an asset sale, the
buyer has to establish a new company and move the purchased assets
into it. In this regard purchasing the stock instead of assets can
be very advantageous since the registration for assets and
operational licensing associated with the business is already
established and would have to be re-done for a new company in an
asset sale.

Experience has shown, that in
either case of stock or asset sale, the purchase contract will cover
unforeseen contingencies in indemnification clauses anyway. It is
typically the buyer’s attorney that drives this decision and this
personal perspective in risk.